Impact of Government Policies on Vancouver Real Estate

The Vancouver real estate market has long been a focal point of both local and international attention due to its dynamic nature and skyrocketing property values into a real estate bubble that is doomed to eventually burst. Amidst this backdrop, government policies and regulations have played a pivotal role in shaping the market's trajectory. In this article, we will delve into how specific government policies, such as foreign buyer taxes and vacancy taxes, have left a distinct mark on Vancouver's real estate landscape.

1. Foreign Buyer Taxes: A Bid to Curb Speculation

In response to concerns about foreign investment driving up property prices and making housing unaffordable for local residents, the provincial government introduced foreign buyer taxes. The taxes, typically levied as a percentage of the property's value, aimed to curb speculative buying by non-residents. The impact was swift and substantial. These taxes not only cooled down the market by deterring some international investors but also generated revenue for housing initiatives geared towards affordability.

2. Influence on Buyer Behavior: Reorienting Investment Strategies

Foreign buyer taxes prompted a shift in investment strategies. Some overseas buyers reconsidered their options, opting for different locations or types of investments, while others explored ways to circumvent the taxes through legal means. Additionally, local buyers often found themselves in a less competitive environment, potentially contributing to more stable property prices and improving affordability conditions.

3. Vacancy Taxes: Encouraging Property Utilization

Vancouver's vacancy tax was introduced to address the issue of vacant properties, which were seen as contributing to a shortage of available rental units. Property owners were required to either rent out their properties or pay a vacancy tax on the property's assessed value. The aim was to encourage the utilization of housing and alleviate the city's housing crisis. This policy not only incentivized property owners to contribute to the rental market but also generated additional revenue for the government.

4. Impact on Rental Market and Long-Term Housing Supply

The vacancy tax, along with other policies aimed at increasing rental housing availability, had a notable impact on the rental market. More properties were brought into the rental pool, helping to alleviate rental shortages to some extent. However, critics argue that while vacancy taxes target vacant properties, they may not be as effective at addressing affordability in the long run, as the underlying issue of housing supply remains a challenge.

5. Ripple Effects and Adaptation

Government policies designed to regulate the real estate market often lead to ripple effects in related sectors. For instance, the introduction of foreign buyer taxes and vacancy taxes may impact real estate professionals, property management firms, and even construction companies. These stakeholders must adapt to changing market dynamics and consider the implications of policy shifts when planning their strategies.

Conclusion: A Balancing Act

Government policies aimed at influencing the Vancouver real estate market have been both praised for addressing affordability concerns and criticized for potential unintended consequences. As the market continues to evolve, it's crucial for policymakers to strike a delicate balance between curbing speculative activities, ensuring housing affordability, and promoting sustainable growth. For investors, buyers, and industry professionals, understanding the impact of these policies is essential for making informed decisions in this ever-changing real estate landscape.

A Brief History of Real Estate Bubbles and Why they Implode

Real Estate Bubbles have historically imploded due to various factors. Here are some common ways that housing bubbles in the past have experienced a collapse:

1. Speculative Buying and Overvaluation: Housing bubbles often start with a period of speculative buying, where investors and homebuyers purchase properties with the expectation that prices will continue to rise. This speculative behavior can lead to overvaluation, where housing prices become disconnected from their intrinsic value. Eventually, the unsustainable prices reach a tipping point, leading to a collapse.

2. Excessive Mortgage Lending and Subprime Crisis: In some cases, housing bubbles have been fueled by excessive mortgage lending and relaxed lending standards. Lenders may provide loans to borrowers who are not financially qualified, creating a situation where buyers are purchasing homes they cannot afford. The subprime mortgage crisis of 2007-2008 is a prime example of how the collapse of a housing bubble was amplified by the failure of subprime mortgage lending.

3. Bursting of the Housing Demand: Housing bubbles rely heavily on high demand, often fueled by factors such as low-interest rates, easy credit, or a strong economy. When these factors change, and demand suddenly decreases, it can trigger a collapse in housing prices. For example, an economic recession or a sudden increase in unemployment can significantly reduce housing demand, leading to a bubble implosion.

4. Oversupply of Housing Inventory: In certain situations, housing bubbles have imploded due to an oversupply of housing inventory. If developers and investors build or invest in an excessive number of properties without matching demand, it can result in a surplus of available housing. This oversupply can lead to price decreases as sellers compete to attract buyers, ultimately causing the bubble to burst.

5. Rising Interest Rates: Housing bubbles are often characterized by low-interest rates, which encourage borrowing and drive up housing demand. However, when interest rates start to rise, it can make mortgages more expensive, reducing affordability for potential buyers. Higher borrowing costs can weaken demand and lead to a decline in housing prices, contributing to the implosion of the bubble.

6. Financial and Economic Crisis: Housing bubbles can coincide with broader financial or economic crises, which can intensify their impact. For example, the global financial crisis of 2008 had a significant adverse effect on housing markets worldwide, exacerbating the collapse of housing bubbles.

7. Negative Market Sentiment and Loss of Confidence: Market sentiment and consumer confidence play a crucial role in the stability of housing markets. If negative sentiment spreads among buyers, leading to a loss of confidence in the market's long-term viability, it can trigger a sell-off and further decline in prices, ultimately causing the bubble to burst.

It's important to note that each housing bubble is unique and can result from a combination of factors. The implosion of a housing bubble is often a complex event influenced by economic, financial, and psychological factors, making it challenging to predict precisely when or how a bubble will collapse.

Real Estate Bubble making Canada's Wealth Gap Worse

Canada's real estate bubble is going to burst. It is just a matter of when.

With the pandemic and other factors fueling housing prices, plus rampant speculation, it is really just a matter of time before housing prices become unaffordable and the market collapses under economic pressures.

And if you look around at all the economic pressures, you know it is going to happen.

The bubble has to burst. Toronto and Vancouver rank up there with San Francisco and Los Angeles for the most expensive real estate markets, and while Canada's market has been stable... Our median incomes haven't been going up enough to justify the rapid increases in home prices.

Eventually the wealth gap between rich and middle class will make it impossible for even middle class people to afford a house unless they take out huge mortgages they cannot afford. And when the next big recession hits...

How to Invest in French Alps Properties

Let's pretend for a moment you have a lot of money that you want to invest in real estate. Well, you could invest it in Canada - specifically cities like Toronto and Vancouver where real estate prices are skyrocketing at breakneck speed, but are also dangerously into bubble territory.

It is basically a high risk, high reward situation when you invest in real estate in Toronto or Vancouver. Prices are going up quickly, but when that bubble bursts a lot of investors are going to lose most of their investment. And do you really want to be doing that during a pandemic when the economic future of Canada is uncertain?

What you need is an alternative that is a safer bet - more stable - with guaranteed year over year higher valuations, but with less risk involved.

So what you want to be thinking about is luxury properties in places that are desirable.

Enter the French Alps. Or any of the Alps for that matter. The French, the Swiss, the Italian. That whole region is ripe for investment, and because the types of properties that are available there are ski resorts and chalets, you can basically guarantee that they will continue to be desirable for many decades to come.

You can invest in properties near lakes, near mountains, ski resorts, prestige chalets, hotels, older properties and newer properties that are being built right now. New constructions are an excellent opportunity for investment, provided the construction company is reputable and has a solid plan for how to make a profit from the chalet or ski resort or whatever it is they are building.

You can even buy a home in the French Alps and use it for vacationing in France, and sell it ten years from now for a tidy profit. And when you're not using it yourself, you can rent it out so that you're earning money on the property even when you're not vacationing.

Want to invest in a French Alps property / vacation in France / rent out your property? What are you waiting for?

Or even if you're not interested in vacationing in France there are lots of other locations to consider. Any place that is a tourist location is a hot commodity these days for rentals and a smart investment as their prices only ever go up.

With the exception of Florida.

Do NOT invest in Florida.

Any place like Florida which will be flooded in the next 30 years due to rising sea levels is a bad investment. Don't invest in any location that is in a flood plain unless you're willing to get flood insurance for the entire time.

But the good news is that the Alps and various mountain resort regions don't really have flood issues. What they need to worry about is avalanches, mud slides, etc. So when doing your research you should also check how many avalanches were in the area during the past 100 years and how much property damage there was. (And what the price of avalanche insurance is.)

Remember! Always get insurance to protect your investment!

The Economic Dangers of Real Estate Bubbles

 

Record Low Interest Rates

Record low interest rates for mortgages are keeping Toronto's real estate market at record highs. Torontonians are buying houses for incredible prices (often in bidding wars) despite the fact that we still have a pandemic going on.

Honestly I wonder if we had a war - possibly even a major war - if we might still be seeing this trend so long as the interest rates are super low and people feel safer in "a new house in the suburbs".

Meanwhile the CERB, CESB and various other measures like a moratorium on evictions have kept the Canadian economy alive, but in the next few months CERB and CESB are being phased out and evictions will resume. Those measures kept the Canadian economy going and Canadians spending money.

It could be that we shall see the true effects on the economy during the next 9 months if we see more companies declaring bankruptcy. There has already been dozens of large scale bankruptcies during the past 5 months of the pandemic, effecting tens of thousands of employees.

Similarly low oil prices means that various parts of Canada have shut down oil production, and yet gasoline prices remain high - proof that gas companies are continuing to unfairly gouge Canadians.

Thus I cannot help but feel that even though Canadian home buyers are benefiting currently from record low interest rates that we are standing on a precipice of what could be the biggest recession or depression in decades. I don't think the current situation is sustainable. Housing prices will have to crash eventually when a recession finally hits, and hits hard.

Canada managed to avoid the housing bubble bursting in 2008. Instead prices have continued to balloon, largely due to low interest rates.

But even record low interest rates must have a limit for how much they can stave off a recession or depression.

Why did China ban skyscrapers?

China recently passed a ban on the building of new skyscrapers that are over 500 meters tall, leading to new buildings being cut short at 499 meters to make sure they fall within regulations.

But why?

Is it because the Chinese government is worried about earthquakes?

Is it because they are worried about shoddy construction?

Or is it because they are worried about Ponzi schemes in which real estate developers build new structures for investors, and then pay off older investors by attracting new investors for other buildings that haven't yet been built... and they still manage to make a profit because they are cutting corners on construction costs, which in turn contributes to shoddy construction and increases the risk of more damages if a big earthquake ever hits the region?

Honestly... probably "All of the above."

And even those buildings that are below 500 meters are now being reviewed for earthquake safety and energy efficiency.

Lastly the Chinese government also wants to make certain that the architects "better represent Chinese culture"... which is code for 'the architect has to be Chinese'. No hiring American or Japanese architects for example.

So clearly something is up.

China has been building up a huge real estate bubble for decades now and it is doomed to burst sometime.

It is quite possible that the Chinese government is now working to prevent such a bursting bubble by toning down the construction with more red tape and regulations.

How to Launder Money through Real Estate

Every year in Canada over $40 billion CDN is laundered through real estate transactions. Over $130 billion CDN is laundered in Canada every year, but over $40 billion is being laundered via real estate because it is so easy to launder money via real estate.

And the real estate brokerages are in on it.

So how does it work?

#1. Get lots of dirty money by being a criminal.

#2. Hire a lawyer with no ethics who doesn't ask a lot of questions.

#3. The lawyer sets up a dummy corporation that can be used to buy and sell properties, using cash.

#4. Find an unethical real estate broker or brokerage who won't report suspicious behaviour and doesn't ask questions.

#5. Pay in cash.

#6. Later sell the property and get paid via electronic transfers to your bank account. That money is now "laundered".

It is stupidly easy to do too, and while it is illegal to launder money, the above steps aren't actually illegal (except for #1 obviously) and there is no laws requiring lawyers or real estate brokers to report suspicious behaviour.

So how does this effect YOU???

Well, it means that a percentage of houses in Canada every year are bought up by criminals who can outbid you easily because their primary goal is to launder the money.

It means that real estate prices in cities like Toronto and Vancouver frequently go up by 5% or more annually (purely from criminals driving up prices).

And as noted in the video above, 5% per year is the difference between a $1 million house selling for $1.65 million after 10 years of ballooning prices.

So this is actually a huge problem and it is contributing to Canada's real estate bubble.

And when that bubble bursts it will be home owners who end up getting hurt the most, not the criminals.

Toronto Home Sales Drop in March 2018

No comment.

Toronto in a 1980s Style Housing Bubble

Bank of Montreal economist Doug Porter says Toronto is the midst of a housing bubble, and is making comparisons to the housing bubble of the 1980s - which ended in a collapse and a recession.

"There’s nothing tentative about the red-hot housing market in Toronto and neighbouring areas," says Porter, in a note out Monday.

Porter is referring to the 22 per cent price appreciation of existing homes over last year's prices. He is now predicting a 19 per cent increase in condo prices in the Greater Toronto Area (during 2017) and says to watch for double-digit gains in the Greater Golden Horseshoe.

"An apparent influx of foreign wealth, coupled with record-high demand and a shortage of detached properties, are driving the frothiest price increases since the late 1980s. Prices are even accelerating in segments and areas without shortages."
 
"Admittedly, condo supplies in the GTA are down sharply from prior elevated levels, but a record number of units are now under construction…so why the froth?" asks Porter.

Porter also notes that Montreal and Ottawa have entered a lengthy period of stagnation, that Alberta is stabilizing.

And that there should be "some further softening in Vancouver’s prices", compared to last years 33% increase in Vancouver prices.

The national average price for homes sold in January 2017 was $470,253, up only 0.2 per cent from a year ago and carried mostly by sales in Toronto and Vancouver.

However if you ignore Greater Toronto and Greater Vancouver, the average price of a home in the country is reduced by almost $120,000 to $351,998.

Counting adjustments for inflation and the lack of increases in housing prices across most of Canada, the cost of homes across most of Canada is actually going down comparatively. The GTA and GVA are inflating the national average and skewing the results. Which is similar to what happened in the 1980s. The average prices across Canada stagnated and went down first, while Toronto and various cities experienced a real estate bubble.

And then the bubble burst, economic chaos and a recession resulted. The stagnation across Canada was basically the canary in the coalmine, warning of the impending disaster.

2010s Vs the 1980s, What is Different?

Toronto and Vancouver's real estate bubbles are now mostly driven by foreign investors. That is what is driving the prices to ridiculous heights. That means that the rest of the country could go into a recession and as long as Toronto/Vancouver's prices continue to balloon upwards, the investors will just keep investing.

In British Columbia, Vancouver is trying to curb that by introducing a 15% land transfer tax on foreign investors.

In Ontario, Toronto has rejected the idea of a land transfer tax and has embraced the status quo for now...

But then Toronto Mayor John Tory announced recently that he would be increasing property taxes in Toronto by 2%.

Which gave me an idea.

Don't increase the property taxes for regular Torontonians.

Increase the property taxes for foreign owners of Toronto residential real estate instead. By say... 22%. Or more. Perhaps 27%.

You will note that this would only effect residential investors.  It would still allow for foreign investors in commercial and industrial real estate, which means they are investing in Canada's economy.

If the prices of homes in Toronto are going up by 22%, increase the property taxes on foreign owners of by a like amount (plus maybe an extra 5% to make it 27%).

So if prices in 2017 go up 19%, the property tax for foreign owners should be 19 to 24% higher than people who actually live here.

The thing about property taxes is that it is every year. The land transfer tax is only an one time thing.

Now property taxes are not a huge amount, but those property taxes would mean the mayor wouldn't need to raise taxes on Torontonians (people who might actually vote for him) and only harms non-voters who don't even live in Toronto.

Over time the property taxes on foreign owners could be increase gradually until Toronto's housing market stabilizes to a more reasonable and normal growth. Which means Toronto ends up with a stable and sustainable housing market that can withstand global and local recessions - instead of an ever ballooning market that will burst the moment the local economy hits a recession.

Toronto home prices are a big risk says BMO

Toronto home prices are a deep concern to Canadian banks - and they're banking on a drop in real estate prices.

So much so that surge in Toronto prices is described as a major economic threat in a new Bank of Montreal report.

In an economic forecast for North America released this week, BMO noted three "risks" to the North American economy, namely:

1. embattled emerging markets.
2. the continuing tussle over the U.S. government debt ceiling.
3. residential real estate in Canada’s biggest city.

Seriously, Toronto's housing prices / real estate bubble has bankers quaking in fear and using words like "collapse", "crumbling", "major economic threat", etc.

For months some economists have been trying to downplay the worries of big Canadian banks - who stand to lose a lot of money if the Toronto real estate bubble bursts. Some have tried to describe the impending doom as "a minor setback", hoping that when it happens it will simply be a market correction that causes prices to drop a mere 10% - whereas the Toronto real estate market's bubble is overpriced by about 40 to 50%. A realistic market correction would be ballparked at between 25% to 45% drop in real estate prices - and a huge unemployment rate that would send construction workers, auto manufacturers and bankers running for the hills and wanting to hibernate in a cave (bear market pun) until the chaos is over.

I find it really funny when market analysts try to downplay the size of Toronto's real estate bubble. Let me explain by doing a little economics lesson.

What is Toronto's two biggest industries?

#1. Banking.

#2. Construction.

We don't really manufacture anything, Toronto's economy is basically just banking, construction and the service/sales industry. Money pours into Toronto from Canada and the USA thanks to Canada's big banks - and a lot of that money - the lion's share - is from mortgages.

If housing prices drop, Canada's big banks lose money. If housing prices drop significantly, the banks lose a LOT of money.

Simultaneously if housing prices drop, the construction industry dries up. Construction workers are laid off, they and their families stop spending money, and thus the economic down spiral begins. A local recession ensues and many jobs are lost as companies "tighten their belts" by shedding jobs of anyone they don't see as necessary.

If Toronto has a robust manufacturing sector that ships internationally, this wouldn't be as much of a problem. South Western Ontario has a lot of manufacturing jobs, but that is over near Hamilton, Guelph, Kitchener. The auto manufacturing sector will be hit the hardest - but other types of manufacturing will be fine for the most part.

The problem however is that home prices in Toronto have skyrocketed at a ridiculous rate during the last 20 years - largely due to foreign investors in Toronto's condo market. That means that when prices start going down it won't be any minor dip. It will be more like a landslide as investors suddenly sell off their assets and flee the market in droves.

"In Canada, accelerating home prices in Toronto (7.1 per cent year-over-year in January) risk straining affordability further, causing a correction when interest rates normalize and the market is trying to absorb a record number of newly built condos," says BMO senior economist Sal Guatieri.

Mr. Guatieri’s comments follow last week’s report from the Toronto Real Estate Board, which showed the average selling price in January surged more than 9 per cent to $526,528 from a year earlier. The so-called benchmark price rose 7.1 per cent, as the BMO economist noted while warning that real estate price growth is outpacing family income by a huge margin.

In layman's terms that means Toronto home prices have become so ridiculous people can barely afford them - so a single large economic hiccup could be the flea that breaks the camel's back. The real estate market in Toronto is the keystone that holds Toronto's economy in place - give it a big bump and the whole structure collapses.

In Toronto, this is one of the bigger risks, more so to the local economy, Guatieri says in an interview. Guatieri worries what will spark trouble over the next few years is when interest rates rise.

The higher interest rates would cause people to slow their home buying - which is already slowing - and result in people looking to sell to drop their prices in an effort to find buyers. If they see a collapse coming they will be rushed to market and try to sell faster rather than later when prices will be even less.

Consider, too, that according to the latest report from the Canada Housing and Mortgage Corp., also released this week, which showed Toronto ignoring the national trend when it comes to residential construction starts.

While those across the country edged down, housing starts in the Toronto area climbed to an annual pace of 36,186 units in January from 32,281 in December - mostly bought on credit from the banks.

The six-month moving average puts the number at 36,367, up from December’s 35,547.

"Apartment starts remained high as the relatively high number of projects which began selling in 2011 reached sales targets that allow construction to begin," CMHC said of the Toronto market.

Across Canada, housing starts slipped to an annual pace of 180,248 in January from 187,144, the agency said, with the six-month moving average declining to 191,456 from 194,518.

Which means the Canadian economy is cooling, but Toronto is steaming ahead fueled by easy credit.

"The decline in starts is an indication of housing supply falling into alignment with demand in most major markets (Vancouver, Calgary, Edmonton, Quebec City)," says economist Connor McDonald of Toronto-Dominion Bank.

"However, we expect Toronto to follow suit as homes under construction reach completion and more supply comes online. Over all, the recent cooling of housing starts supports our view for a soft landing of the Canadian housing market in 2014 and 2015."

See his choice of words? "Soft landing" is his wishful thinking. He is just thinking in terms of supply and demand, he isn't thinking of what will happen when those same construction workers are laid off and the economy sours - and housing prices drop at a sharper rate than he is expecting.

In his report Guatieri notes how the boom in Canadian housing is largely over as potential home buyers adjust to tighter mortgage insurance rules brought in by the government to head off Toronto's real estate bubble - a tactic designed to prevent it from bursting.

"Not so in Toronto, however, as its prices continue to outrun median family incomes, which averaged slightly over 2-per-cent growth from 2001 to 2011," says the BMO economist.

"Consequently, affordability continues to deteriorate even with relatively steady and low interest rates. While Vancouver remains the least affordable city in Canada, some softening in prices there has allowed Toronto to rapidly narrow the gap."


Yada yada yada, Toronto can't afford these ridiculous high prices in homes so the bubble is going to burst when too much supply outpaces demand and the construction workers are all laid off.

Home Prices in Toronto - History

 In the last 40 years we have gone with an average house price of $32,513 in 1972 to a whopping $497,301 in 2012.

It is over 15 times the difference in price.

During that time Ontario's minimum wage has gone from $1.65 in 1972 to $10.25 in 2013 - a difference of 6.2 times. So housing prices have skyrocketed a whopping 15 times, while the minimum wage has scarcely gone up.

What about per capita GDP?

Canada's per capita GDP (the average earnings per Canadian) was $13,320.19 USD in 1972. In 2012 it was $25,933.29 USD. [Source http://www.tradingeconomics.com/canada/gdp-per-capita ] So our GDP per person has effectively only doubled in the last 40 years.

And yet house prices in Toronto haven't doubled. They've gone up 15 times.

The average price of a Greater Toronto Area (GTA) home was just $21,360 in 1966. Can you imagine how comparative cheap that was? Last year, on average, homes in the GTA cost $497,301. That means that GTA homes are 22 times more expensive than they were 45 years ago.

And during all this time we've only seen ONE real estate bubble burst back in 1990, with a low point in 1996. During that 6 year period prices dropped an average of $56,870 - roughly 22.3%.

If we were to encounter a similar drop in the near future - from a high point of roughly $500,000 - then the average price would drop to $388,500, which would be back down to 2008 levels, back when the Great Recession in the USA was going on due to the bankruptcy of many mortgage investment companies (and the bailout of several of the larger companies who were considered to be "too big to fail").

Now of course if the real estate bubble in Toronto burst it wouldn't drop the exact same amount. If anything it would drop a lot more than that because Toronto has almost no manufacturing and has a mostly service based economy - which means when profits dry up many companies that provide services would simply layoff huge numbers of staff to make up the difference.

For example when the condo bubble bursts in Toronto the construction of new condos will grind to a halt. Construction workers will be laid off. Those construction workers will have less money to spend + many people who put money into unbuilt condos will lose a chunk of their savings. Those people will then spend less and cut back on things like services. Thus begins the whole downward spiral. If you've studied economics I don't need to go into great detail.

Playing with Numbers

The reality is that the cost of housing in Toronto has reached such a high price that is now well-night unaffordable. Families are going into huge debts just so they can buy a house that they can barely afford on their current salary.

Back in the early 1980s it wasn't so bad... even though the mortgage interest rate was 22% in 1981 (that is not a typo, it really was 22 per cent) people could still afford to buy a house and raise a family because the costs of houses had not yet skyrocketed to such idiotic proportions. The average price of a Toronto house in 1981 was $90,203. It was a very reasonable price at the time and people didn't mind paying the huge interest rates because it was so darn affordable.

In contrast the mortgage interest rate in Canada in 2012 was hovering just under 3%. Low interest, but outrageous house prices.

Lessons from History

If you put both of the above charts side by side, patterns will start to emerge. At the end of 1979, the prime interest rate sat at 15.25 per cent - a shocking number by today’s standards. By the end of 1980, however, that number had risen to 20.5 percent. Home sales and home values skyrocketed from $70,830 in 1979 to $90,203 in 1981. They rose even further in 1983 to $101,626. As a direct result of rising interest rates, sales rose. The mentality at the time was something along the lines of I-better-buy-a-house-before-prices-get-worse.

The rising interest rates and rising home prices were scaring people into buying a house ASAP. Today it is the opposite, people are scared about a possible crash - but they are buying houses at ridiculous prices because they've got their head in the clouds thinking that the government will somehow save them even if a crash does come. We've taken the lessons from 2007 and turned it into a safety blanket and a false sense of security - forgetting all the while that over 13 million Americans lost their homes during the Great Recession and the government did nothing - absolutely nothing - to stop it from happening because they were too busy bailing out the banks instead.

Back in the early 1980s with interest rates as high as they were, it’s no wonder that many families struggled. As interest rates rose, more and more families lost their homes because they couldn't afford the rising cost of payments. But the percentage of people losing their homes during the 1980s was nothing compared to what happened during 2007 to 2009.

By the mid-1980s, interest rates dropped dramatically. While the prime interest rate hovered just above 20 percent in 1980, by 1984 it had dropped to 13 percent. (Note! Mortgages rates are often 1 or 2 per cent above the prime rate.)

The prime rate dropped even further in 1985 to 9.5 percent, and even 7.5 percent in 1986. As interest rates dropped, the dream of home ownership became a realizable goal to many. As a result, more buyers entered the market, creating more competition, and housing values rose substantially - the start of a bubble.

In 1985, for example, the average home in Toronto cost $109,094. A mere two years later, that number rose to $189,105. That is a huge jump in two years.

The recession of the early 1990s lowered over-inflated home values. While the average price of a Toronto home in 1989 was $273,698 (prime rate was 11.5 percent), by 1992 that number had dropped to $214,971 (prime rate was 6 percent). Both prices and interest rates were dropping because the economy was considered dire at the time.

It’s weird because the market conditions often depends more on MOOD than anything else. First interest rates went up in order to curb spending; then they’re dropped to encourage spending. It’s all just playing with the numbers in an effort to balance the economy and the needs of people.

Fast forward to the present. Ridiculously low interest rates and ridiculously high home prices. But we're too afraid to raise interest rates quickly because we're afraid it might hurt the economy.

At the beginning of the economic recession in 2007, we saw home values in the USA drop 40 to 50% in some places. Interest rates dropped to ZERO during the collapse. It was basically free credit. It was done in order to help boost spending.

At the same time, amid the chaos, America was also suffering under a housing shortage - like Toronto currently does. The shortage under normal circumstances drives up prices - often to ridiculous levels. But during a crisis the shortage becomes a stop gap from prices dropping too much because there will always be people who realize, hey-if-I-buy-now-the-prices-are-pretty-nice.

While one could conclude that the housing market follows a pattern and is, therefore, predictable, it isn’t always as easy as that. We are really just guessing.

For example I am guessing that Toronto's condo market will suffer a collapse in 2015-2016 and prices will drop roughly 30 to 40 per cent because of all the overseas investors losing their shirts - and I am basing that number on the fact that condo builders are building a surplus of 40% more condos that will all hit the market in a two year period.

Many economic predictions are proved incorrect. Many of them are off by anywhere from 10% to completely contradictory if something completely illogical manages to happen. Interest rates might rise. Housing prices might fall instead. Condo prices might skyrocket. It is possible I suppose, just highly unlikely.

Conclusions

Buy low, sell high. Interest rates may rise and fall, but nothing beats a house bought at a decent price.

New Condo sales Fall 55% in Toronto 2013

Toronto condo sales plummeted by 55% in the first three months of 2013 over the same period last year.

The changes has made developers and investors skittish, as developers are now holding back new project launches and have taken a wait-and-see approach in the face of Toronto's softening market and climbing inventory of condos for sale - which are not selling unless people lower the prices.

A total of 2,728 new units were sold up to the end of March of 2013, down 29% just from the final three months of 2012. That's less than half the 6,070 units sold in the first quarter of 2012 when the condo market was starting to wobble and fall from a record year of sales — 28,190 units — in 2011.

 

Meanwhile Toronto's inventory of unsold condo units in new projects climbed during Q1 to 18,845 units, a 21% jump over a year ago.

 

Most of those unsold units, about 64 per cent, are in buildings still in the pre-construction sales phase, meaning they have yet to be built - which means the investors and developers would end up losing money if the projects are cancelled.

So far there hasn't been a collapse in prices, but that is likely because the volume of condos on the market has yet to dramatically increase. The sudden increase will happen in late 2014 - and by 2015 we can expect a collapse in condo prices as the market becomes flooded with cheap condos which were purchased by foreign investors with the intent to flip them for a profit.

But since those investors borrowed money from investment banks - and banks will want their money back - the investors will need to sell for less than their asking prices when the banks start demanding their share.

In which case we will see economic chaos on the level of what happened in the USA in 2007-2008 - except this time in Canada and any places that used bank money for gambling on Toronto's future condo prices.

Mixed signals from Toronto’s real estate market

During May 2013 more than 10,000 properties were sold across the GTA in a real estate market which is down nearly 3.5 per cent from May of 2012.

Sales of single detached homes are up almost 1% and prices in that segment included a 3% year-over-year increase. Toronto Real Estate Board President Ann Hannah describes the market as showing improvement over the past two months.

Ann Hannah believes potential home buyers who had delayed their decisions because of mortgage rule changes by the federal government are now becoming active in the market again.

The average sale price for real-estate across the city in May 2013 was $542,000, up by 5.4% in a year.

However condo sales were extremely weak, down over 9% compared to May 2012, but prices rose slightly.

I believe homebuyers are becoming extremely wary of buying a condo because of fear of when the Toronto Condo Bubble might collapse.

I am predicting condo prices in 2015 - 2016 to drop between 30 to 40% as tens of thousands of new condos come on to the market and flood the market with too much extra supply.

Who will lose their shirts when the condo bubble bursts?

If you are looking for MY QUEST FOR A CONDO, click here.

Some economists and self-proclaimed real estate experts (I'd argue that nobody is a 'real expert' on that topic) are asking: Who will lose their shirts when the Toronto condo bubble bursts?

Well, it actually really depends on WHEN and HOW MUCH the condo market bursts.

In theory you could make a mathematical equation showing what people will be most effected. It would look something like this:

Percentage of Value Lost = Number of People who purchased their condo within an allotted time before the loss based on how much their condo was worth when they purchased x the Perecentage who have "Unstable Employment" + the Percentage who "Paid Too Much" + Other mitigating factors...

Determining how to write such a complex equation and all the factors would be a serious puzzle even for a skilled mathematician, which I am not.

Here are some of the additional factors:

#1. The longer it is delayed the worst it will be when it does burst. More debts piled on to the problem will mean a deeper recession in the local economy in Toronto.

#2. How widespread the debt problems are within Toronto's middle-class (which will take the lion's share when it comes to people losing their proverbial shirts) and to what extent the lower and upper middle class will be effected.

#3. What percentage of people has an insecure job that might be cut if the economy goes sour? Also what percentage may end up having their hours cut and lose a percentage of their take-home salary?

Yada yada yada...

Earlier this week when the CMHC (Canada Mortgage and Housing Corporation) reported that construction of multiple units, such as condos, drove housing starts to an annual pace of 244,900 in April 2012, the strongest pace since September 2007 right before the real estate market in the USA collapsed.

Chief economist (and self proclaimed real estate expert) David Rosenberg recently weighed in on the topic of Toronto's condo bubble overheating.

"If you think [new] constructions are volatile on a month-to-month basis, the fact that new home starts have been rising for five months in a row (by 93% an annual rate over this time frame) may make you wonder whether the strong building momentum is sustainable or whether there is a Canadian housing bubble formation at play," said Rosenberg on May 10th.

Rosenberg, the chief economist at Gluskin Sheff + Associates, says that over the past five months construction starts for multiples such as condos have surged by 220%, at an annual pace, compared to a dip of 1% for single homes. Its highly unusual to see a huge jump in just condos and not have home construction go up at the same time unless there is some serious overheating happening.

Typically the ratio of condos to single unit houses is at its highest right before a bubble bursts.

Right now the multi-to-single ratio of starts is at its highest level since the last housing bubble popped in the early 1980s. Rosenberg says that lends weight to Toronto's bubble size as more than normal investment and speculative demand floods Toronto's condo market.

If the market was truly behaving normally then residential construction would also be high and behaving according to natural demographic demand. But the ratio is highly skewed towards condos being funded by investors hoping to flip them for a profit.

Thus it would seem only logical that it is the investors who are going to lose their shirts... except it isn't. Canadian banks and the CMHC are the ones holding the bag because many of the investors are actually foreigners using money from Canadian banks, which are ensured by the CMHC which means Canadian taxpayers will foot the bill when the condo market becomes flooded and it hurts everyone who recently bought a condo (and hurt house prices too when condos become really cheap).

"No doubt the Canadian economic backdrop is solid overall and mortgage rates are at low levels," says Rosenberg. That makes Canada an easy target for investment because its so easy to mortgage to buy a condo that isn't even built yet.

But if the condo market becomes flooded then who is going to buy all those condos when it comes time to flip them?

Rosenberg also notes that the Bank of Canada governor Mark Carney has been trying to warn people.

"But at some point, the Bank of Canada will no longer be playing the role as the boy who called wolf, and mortgage guidelines are already being tightened up," says Rosenberg in his report. "If you are in the market to buy a home, that is one thing. But the condo market - quite another. There is no timing to this except that the next [Bank of Canada] rate-hiking cycle will likely prove to be the sort of situation where the tide comes in and we see who is standing on the shore stark naked."

Or at very least who lost their shirt when the tide came in.

Depending on how badly the bubble bursts it could spell danger to anyone who bought a house too when all those cheap condos flood the market.

In which case Bank of Canada governor Mark Carney isn't really the boy who cried wolf. He's the boy who pointed out that the Emperor has No Clothes.

Vancouver's Real Estate Woes

Toronto isn't the only city in Canada which is facing a market correction.

Vancouver has also seen real estate prices soaring in the stratosphere.

However I don't think Vancouver and Toronto will see market corrections at the same time. Their economies are separated by 4492 km and very different market modifiers.

Those modifiers are:

The amount of local demand for real estate. How many people are looking to buy?

The amount of real estate investors in Vancouver. How many are looking to flip for a profit?

The amount of available supply of houses and condos (and rental supply).

The amount of upcoming supply of houses and condos (and increasing rental supply).

The strength of the local economy (the employment rate + the median salary of the middle class).

Local consumer confidence.

Local household debt.

Ratio of average home sale prices to the middle class median income. (No point using lower class incomes because many of them can't afford to buy homes, diddo for wealthy people who have more stable incomes.)

Local demographics (ie. What age groups are buying condos? Elderly? Young professionals? Families?)

And lastly the ratio of housing starts vs condo starts.

ie. In Toronto housing starts has dropped, but condo starts are through the roof. Mostly due to the rising price of land and the air-space is comparatively cheap.

In Vancouver? Housing starts were steady in April 2012 (but up in the rest of British Columbia) and have been growing steadier since the huge market decline in 2009. But its the volume of condo starts in Vancouver which are worrying.

In Toronto (not the GTA) the average price of a house reached $568,436 in April 2012. The average price for a detached single-family home hit $831,214 (doubled in price since 2002), according to TREB.

In contrast the average single detached home in Vancouver runs over $1 million, but the market for homes is softening while the condo market is heating up.

So evidently the high prices of houses is fueling the demand for condos, which is causing prices to skyrocket.

Price growth in the GTA are up 10% compared to one year ago (and household debt is likewise up, but salaries are stable). Its a bidding war in Toronto due to lack of supply for homes and the high price of land even in Toronto's satellite cities.

Restrictive Greenbelt policies, strong immigration and low interest rates have kept demand in the GTA high.

Vancouver likewise has benefitted from strong immigration and low interest rates, and judging by the housing growth centres in Vancouver most of the demand is near the shoreline.

According to BMO Deputy chief economist Doug Porter the softening in Vancouver's housing market could see foreign investors, who fueled Vancouver prices, start looking to Toronto as a new place to invest.

The worry however is that the investors ditching of Vancouver (whenever it happens) would cause Vancouver's real estate market to go into a tailspin, and then if Toronto's market overheats a year later the investors will ditch Toronto amidst a similar collapse in prices.

So... here is my prediction. Vancouver's condo and housing bubble may burst first, Toronto's market will go into overdrive (creating an even bigger bubble) and then when Toronto's real estate bubble will burst too when it gets too hot for buyers.

In which case there are two possibilites in terms of a price correction for both Toronto and Vancouver:

Option 1: A minor price correction, going down slightly and then buyers jumping on the opportunity. (Which means a larger correction will be delayed, possibly for years.)

Option 2: A major price correction, with buyers waiting until prices bottom out before taking advantage of the super low prices.

Me? I would prefer a larger correction. The prices on both Vancouver and Toronto are outrageous.

Is Household Debt the real estate market's Achilles Heel?

I have just returned from the studios in the CBC building in downtown Toronto where I was on CBC Radio discussing "My Quest for a Condo" and also Toronto's real estate bubble.

During the interview I asserted that household debt is the largest factor in Toronto's (and Canada's) real estate market.

So am I right? Is Household Debt the real estate market's Achilles Heel?

Yes, but its not the only factor.

The problem with having a radio interview is you can really only provide snippets of conversation within your allotted 6 minutes. There are many factors that go into the hows and whys the Toronto real estate market is going to have a US-style collapse within the next 3 years.

Exactly when I cannot predict, but I can pretty much guarantee it is going to happen when you consider ALL the factors.

#1. 60% of recent buys in Toronto's new condo market are from investors looking to flip the property for a profit. (Source: real estate research firm Urbanation) When Toronto's real estate market hits a serious bump they will sell the properties in a panic.

#2. Interest rates in Canada are currently super low, but if they go up too quickly it will hurt home and condo sales. If they don't go up or barely go up it will encourage an expansion of the current bubble by making credit too easily available.

#3. Foreign investors are taking advantage of Canada's banking and mortgage system wherein the banks put up the cash, the government takes the financial responsibility via the CMHC (Canada's version of Fannie Mae and Freddie Mac) as mortgage insurer and the foreign investors can cut and run if anything goes wrong. Real estate speculators are like sheep. They flee any market they can't make a profit in.

#4. Household debt in Canada is at an all time high. $1.61 TRILLION Canadian dollars.

#5. In 2012 banks started to refuse to give many Canadians more credit because they've recognized the threat of household debt (and financial losses from future bankruptcies). Too many bankruptcies will hurt bank profits so instead they're cutting back on credit availability.

#6. Less credit in Canada's current economic climate means a lowered consumer confidence level. People go out and spend less, tighten their belts and lack of spending = downward spiral into recession.

#7. Rising cost of living in Canada. Prices of food, gasoline and basic goods are all going up (partially due to high oil prices). Since food, gasoline and toilet paper are considered necessities it cuts into the household budget for other things (such as saving up for a house or condo).

#8. Toronto developers are currently building almost 3 times as many skyscrapers as New York City is currently building. Its a lot of skyscrapers. History has shown that developers start building skyscrapers en masse right before a major financial meltdown because land becomes too expensive but credit is too easily available so the only solution is to build vertically.

#9. Many investors rent out their condos and wait for a good time to sell. The rent income pays for the mortgage and its low risk. However if condo prices stagnate or prices drop it becomes high risk and they will be looking to sell in a hurry to prevent taking losses.

I could go on and on, but essentially the economy and housing market is a proverbial House of Cards and household debt/credit is the linchpin which holds it all together.

All it will take is a nudge to cause the collapse.

And here is the nudge that will do it:

Toronto currently has 148 high-rises and skyscrapers being built including 105 new condo buildings (and more scheduled for 2013 - 2015). Right now we are building 27,504 (a 14% increase), but there isn't the demand for it. When that extra 27,504 condos hits the market during the next 3 years it will cause condo prices to drop dramatically... which combined with household debt and people reneging on mortgages (or banks refusing to give them refinancing) will push a market correction.

So yes, household debt is the Achilles heel... but its too much condo supply during the next 3 years that is the ticking time bomb waiting to go off.

Canada's housing starts indicate an ever expanding bubble

Back to the news... If you are looking for MY QUEST FOR A CONDO, click here.

Canada's housing starts have almost doubled since the start of 2009. In the last 3 years Canada's housing starts have gone from approx. 130,000 in January 2009 to almost 250,000 by April 2012.

HOWEVER AT THE SAME TIME Canada's household debts has skyrocketed from $1.3 trillion (it was $600 billion in January 2000) to $1.61 trillion in only 3 years. So either way you look at it ($300 billion in 3 years or $1.01 trillion in 12 years) we've really been piling on the household debt in the form of mortgages, credit cards, lines of credit...

NOTE: $300 billion is enough to buy 600,000 houses for the average price of $500,000. I would hazard a guess that Canada's housing bubble is being fueled by too much credit and household debt.

Bank of Canada governor Mark Carney says he regards Canada's household debt — which currently is at a near-record 151 per cent of disposable income —as the No. 1 domestic risk to the Canadian economy. Individual household debt was $39,597 in 2009, but has risen to approx. $48,735 by April 2012.

Remember that is an average debt per household. It may not seem like a lot, but when you consider the demographics of WHO is in debt you start to realize its a lot more than $48,000.

The following is from Statistics Canada:

32% of working Canadians are not saving anything (for retirement or anything else because they have too many debts to worry about right now).

For people making less than $35,000 a year, 49% surveyed reported that their debt levels rose in the last three years. 42% for people $35,000 to $75,000 a year. 38% for people making over $75,000.

So evidently its effecting lower income people more, but when you consider middle income and upper income people are also packing on the debts (and when you consider its middle and upper income people who buy houses and condos) it becomes self-evident that if a housing market collapse happens it will be the middle class people who have a huge mortgage they cannot afford which will end up losing their shirts.

Driving the housing starts is all the pressure on condos currently happening in Toronto and Vancouver, where the condo markets are so red hot you'd have to be a complete fool to be purchasing during a bubble. (Because when the bubble pops you won't be able to refinance...)

In theory Canadian banks should be more cautious about whom they give mortgages to, but the problem is that the banks don't insure their own mortgages. The CMHC (Canada Mortgage and Housing Corporation) insures them. Its basically the equivalent of Fannie Mae and Freddie Mac in the USA.

NOTE: When the US housing market collapsed in 2007-08 it ended up costing American taxpayers $700 billion in bank bailouts and hundreds of billions of dollars more in economic stimulus from the resulting economic fallout. Due to the CMHC's policies the same thing will likely happen here in Canada between now and 2015.

I say 2015 because that is when the condo market in Toronto and Vancouver will likely implode due to the sheer number of condos currently being built which will become available by 2015, despite the fact that people aren't buying that many condos... See my older article Toronto condo market might burst for complete details.

Toronto currently has 199,000 condo units, but another 27,504 are under construction right now and will be finished by 2015. That will boost supply by roughly 14%. The problem is that there is not enough demand for people to buy 27,500 extra condos in the next years. Prices will have to take a huge hit (by maybe 10 to 12% over the short term), but over the long term it will kickstart a collapse of housing prices in Toronto.

A lot of it is fueled by overseas investors who purchase the condo using a Canadian mortgage (via a Canadian bank, insured by the CMHC) and then flipping it for a profit when the property is built. However if they start taking losses all the investors will pull out of Canada in a hurry and the prices won't just fall, they will PLUMMET.

So yeah, doom and gloom.

But there is a sunny side of this for people like me who wants to get a condo (see My Quest for a Condo). It means that when people are desperate to sell they might be willing to trade...

NOTE: Household debt is leveling off, slowing to 4% annual accumulation in 2012 from a high of 10% in 2011. Why? Many Canadians have reached their credit limits and can't get more credit. The danger however is that this means many people might cut back on spending, which will hurt consumer confidence levels, cause more companies to go bankrupt, layoffs, economic downturn... and possibly a housing market collapse ahead of schedule.

I am still betting it will happen by 2015 to coincide with the condo market overflow of supply, but if it happens sooner than I expect then I won't be complaining. It will just make it easier to buy (or trade) for a condo when the prices drop to half.

Toronto Condo Bubble might burst

CANADA - What happens when you have too much supply, ridiculously high prices and not enough people buying?

The answer is obvious. The bubble bursts.

Toronto keeps building more and more condos, so many in fact that it is above and beyond the demand to actually buy condos.

Lets take for example Ten York...

Ten York is a 75-story glass condo building which 4 years from now will be the 3rd tallest condo in all of Canada. Currently the site is a parking lot and a police impound, but the chunk of land beside the freeway will see a lot of construction in the next couple of years and it is not alone.

Toronto is building more skyscrapers and high-rises than any North American city... in fact Toronto is building almost 3 times as many as New York City is currently building. And we all know Canada's largest city is small potatoes compared to New York City.

So why are we building 3 times as many condos and skyscrapers? Do we need the extra homes close to downtown Toronto and the extra office space?

What is also silly is that Toronto's condo market is pretty soft. There isn't a huge demand, but investors in Toronto's construction industry seem to think this will change.

(But what those investors don't realize is the correlation between building skyscrapers and stock market crashes... see my older article Skyscrapers = Recession.)

Meanwhile average home prices in Toronto is just under $500,000, prices are at record highs and household borrowing is also at a record high. Torontonians are piling on so much debt that if anything happens there will be a huge collapse. Canadian lenders are worried too: The Toronto-Dominion Bank last week raised mortgage rates in an effort to cool off the housing market.

TD Bank isn't alone in its thinking that Toronto is heading towards a condo market burst.

“Condo construction has always been rather prone to boom and bust cycles, and this one seems particularly strong,” says Sheryl King, an economist with Bank of America Merrill Lynch in Toronto. “Builders seem to overestimate how much demand is going to be out there, and that’s when you tend to see some abrupt pull-back.”

According to King, Canada’s housing market is already about 10% overvalued, with inflated prices primarily in Vancouver, Montreal and Toronto. “We would call it a bubble,” she said.

Rising home prices have led to a 53% increase in residential mortgage credit in the past five years, or an average rate increase of 8.9% per year. The volume of outstanding mortgages rose to $1.08 trillion CDN as of August 2011, according to the Canadian Association of Accredited Mortgage Professionals. Defaults currently remain low, at 0.42%, according to government-run housing agency Canada Mortgage & Housing Corp., but if something happens that causes sales to drop off, prices to fall... then defaults could skyrocket.

Too much supply 4 years from now could do just that. Toronto's housing market prices could collapse up to 50% and end up with prices comparable to those in the USA.

Canada’s financial authorities have become increasingly worried and vocal about the possibility of a housing market collapse. The Bank of Montreal and Royal Bank of Canada, Canada’s banking regulator, and Bank of Canada Governor Mark Carney have all expressed worries about the condo markets in 2012 as cranes and construction crews swamp Toronto. They're all fearing a construction led bust which would lead to a recession in Ontario and then effect the rest of Canada.

Toronto currently has 148 high-rises and skyscrapers being built, compared with 59 tall buildings being built in New York City, and 22 going up in Chicago.

Most of the buildings in Toronto is 105 new condo buildings, but there are many more scheduled for the next 4 years. 14 buildings will be finished in 2012, including two hotel-condos: Trump International Hotel & Tower Toronto, which will be Canada’s tallest residential building. Tower Toronto opened January 31st.

What is also interesting is the number of units being constructed. These condos are bigger and more impressive than ever before. Condo builders seem to be competing in an effort to get taller and more luxury units into one building.

“The number of units under construction is quite high, start levels have trended up, and the number of units coming to completion is growing,” says Shaun Hildebrand, a senior market analyst for the Greater Toronto Area with Canada Mortgage & Housing Corp. “Supply at all ends of the development process is growing quite quickly.”

Too much supply.

Toronto currently has 199,000 condo units, but another 27,504 are under construction right now. That will boost supply by roughly 14%. In theory that much extra supply dumped on the market should cause prices to drop roughly 8 to 12%.

If the condo market sees a price drop it will also effect home prices as the supply of cheap condos will make new home buyers think twice about whether to buy a house in the suburbs or a condo downtown.

Add in Toronto's slow population growth and you also realize 14% extra condos seems abnormally high.

“If builders stopped building today, there’s five years worth of supply that is about to be delivered, relative to what normal population growth is,” says Sheryl King of Bank of America.

Then there is the problem of over-investment.

Investors are flooding Toronto’s condo market because of cheap borrowing costs and taking a risk that real estate prices will continue to go up. Its the same risk that the USA was taking in the 2000s before the market collapsed.

“They’re being bought because the interest rate is very low,” says John Andrew, a real estate professor at Queen’s University. “They’re financed to the hilt, so they’re very sensitive to the refinance risk when the loans come up.”

Meanwhile all of Canada's big banks are selling mortgage bonds to investors overseas, worried that when the market does collapse the banks would take a huge financial loss. Bank of Montreal and Bank of Nova Scotia sold $4.5 billion of their mortgage securities last month, after a record $25 billion of sales in 2011. They're getting rid of those debts because they sense the danger on the horizon.

Part of the problem is that when the recession in the USA hurt investment many foreign investors turned to Canada with their money because Canada seemed like a more stable option. They flooded the Canadian market with extra credit and now Canadians are mortgaged and indebted over their heads. Those foreign investors are going to be hurting when the real estate bubble in Canada bursts.

“The stability of Canada has moved it to the forefront of investor preference, in some cases ahead of the U.S.,” states a draft analysis of Toronto’s condo market, but that overconfidence in Canada's stability will be our undoing.

Right now investors represent roughly 25% of Toronto’s condo market and while high-rise home sales are at record heights (62% of Toronto's real estate market is condo sales) the demand still isn't enough to compete with the 14% increase we will see in the next 4 years.

And mortgage lenders aren't expecting demand to keep going up. They're expecting condo demand to hold steady as long as the economy remains stable.

Toronto accounts for 11% of Canada’s economic output. The city is home to Canada’s five-biggest banks, two of the three largest Canadian insurers as well as some of the country’s largest pension funds, asset managers and financial-services firms. Toronto is epicentre of Canada's finances.

So the theory goes that between immigrants, investors and young urbanites condo demand will continue to grow. And yet if that were true, why are the Canadian banks selling those debts overseas unless there was a real danger of a collapse?

Do the banks know something we don't?

Toronto real estate bubble grows 3.8%

CANADA - House sales are down across Canada, including Toronto where the average house prices continue to go up despite lagging sales. The average price of a home in Toronto is now just under $500,000 as of January 2012.

Sales are down in over half of Canada. One of the biggest declines are in Toronto and the GTA where sales are down 3% (including seasonal adjustments), according to January housing statistics released Wednesday by the Canadian Real Estate Board (CREA.)

New listings are also down a seasonally adjusted 4.3% across the GTA, resulting in very low inventory of new resale properties on the market.

The low inventory (shortage of supply) is helping to drive up the average house price in the GTA by 3.8%, increasing Toronto's real estate bubble. The average sale price in the GTA from December 2011 to January 2012 to $486,654, according to CREA.

It is estimated the average price in the GTA will reach $500,000 by July or August 2012. The average price only needs to go up an extra 2.8% for it to reach $500,000.

The average GTA home was worth about 8.5% more in January than over the same period a year ago, the statistics show.

Across Canada the average price of a Canadian home hit $348,178 in January, up 1.2% from a year earlier.